Increasing Use of Card Controls in SMB Market is Reducing “Friendly Fraud”

In 2014 Ondot Systems was a newcomer to Finovate. Now, we have asked them to give us an update on where card controls are in the small-to-medium-sized business market, and where they are set to take the fintech sector, in particular the future of fraud.

The small business credit card market reached 13.9 million accounts in 2015, with an average of 20 transactions per month, accounting for one in every six dollars spent on general purpose cards (roughly $430 billion all together). These payments are fundamental to running the operations of any small and mid-size business (SMB), from purchasing office supplies, paying off utility bills, clearing invoices of various service providers, etc.

An SMB owner opening up a credit card for the business has its benefits like financial rewards perks, and flexibility in spending. If handled correctly, allowing employee use of the owner’s credit cards can simplify the reimbursement process and reduce administrative hassles. However, without proper controls, employee credit cards can encourage bad spending habits, theft, or fraud.

Owner cards are only as good as the communication and trust between owner and employee. Unless the owner keeps close tabs on purchases, there is a risk of “friendly fraud,” which is when an employee takes advantage of their purchasing power for their own benefit. Left unchecked, these fraudulent charges can equate to thousands of dollars lost, the loss of an employee, or even a lawsuit.

A recent study by ACFE found that 60% of small businesses didn’t recover any of their losses from this type of fraud. By giving credit cards to key employees, it implies a high degree of trust, but unfortunately, fraud can and does happen.

According to the Association of Certified Fraud Examiners’ latest study, illegitimate expenses make up around 14 percent of asset misappropriation fraud and cause a median loss of $40,000. If you aren’t monitoring those purchases closely, they may go unnoticed.

Owners typically wear many hats, and managing internal financial fraud should not have to get in the way of running a business. So how can SMB owners take the worry of transactional fraud off of their shoulders? Through proactive card controls, SMB owners can allow the use of SMB payment card by setting where, when and how the card can be used for business purposes.

SMB owners can set limits on purchase amounts, location where the card can be used, types of transactions and even merchant categories. In addition, through a few taps on their smartphone, they can view card activity in real time through push notifications and even turn the card off in case of misuse.

Let’s consider a use case of a small business owner employing truck drivers to distribute food supplies around the town. Truck drivers are given a payment card for fuel and other business purchases to make sure they make it to their destination without any hiccups.

The owner of the business is able to set location controls enabling card use only in the areas of their route, and limit transactions up to certain amount at gas stations only. They can set the parameters to deny the ability to withdraw cash from an ATM or use it for entertainment purposes for example. This avoids unpleasant conversations about card misuse while allowing business owners more time to concentrate on operating their business effectively. Through these controls, receipt management for reimbursement becomes a thing of the past and business expense management is more streamlined.

Another example for of how these card controls can protect SMB owners is in the case of doctors and dentists that have their own practice. Typically these doctors employ two or three people for the office where payment cards are used for everything from office supplies to keeping the lights on. Friendly fraud can often go unnoticed if, along with an office purchase, one were to also shop for some personal items. Such businesses typically do not employ full time accounting personnel to track expenses and run on a small budget where misuse can have an impact on the bottom-line.

Through card controls, SMB owners can take on the task of managing company purchases proactively. With just a few minutes on their smartphone app setting card controls and alerts preferences, they and their businesses can be protected from “friendly fraud.”